Growing Dividend REITs

U.S. equity REITs continue to excel and, on average, have returned an average of 7% so far this month. This should not change. This Wednesday, the Federal Reserve laid out a more conservative scenario for interest rate hikes in 2016 (two rather than four rate increases). Although the Fed has been optimistic about the US economy, they will slow the pace of rising interest rates due to concerns over weaker global growth. Because interest rate hikes have been the source of several REIT selloffs in 2015, we expect a smooth field for REITs to run for the coming months.

Highlights of the Week

This has been another consecutive positive week. We continue to see high interest in net lease retail, which continues to be going well. Seritage Growth Properties, a spinoff of Sears stores, have surprised investors and returned by almost 9% last week. Other stocks such as Realty Income and National Realty Properties have seen valuation multiples get higher over the last weeks and now they seem overvalued. Their dividend yield has been below equity REIT average.

UMH Properties, a small cap in the manufactured home industry, fell by more than 6% this Friday. There was no visible reason for such a sharp drop, which occurred after 2 pm. However, we know that, despite their good dividend history, UMH has not covered their dividends and they seem far from covering them. We believe that the company should have cut their dividends to a reasonable level rather than finance it with debt and equity.

Pebblebrook Hotel Trust

Pebblebrook Hotel Trust surprised many investors and increased its dividend by 23%. Last year we elected Pebblebrook as one of the strongest growth lodging REITs. They have grown AFFO per share more than most REITs have and rewarded shareholders with dividends growing at equivalent rates. So for us, it was not really surprising.

This is a chance for Pebblebrook to react. The Fed decision may be what investors were expecting to invest in lodging again. Without much government interference, we could finally see a robust recovery from undervalued lodging REIT stocks. We have always put the company as part of a group of REITs that enjoy ‘premium’ valuation because of strong quarterly results, experienced management, and its good size in terms of market capitalization.

When we last looked at Pebblebrook on October 23, 2015, its AFFO multiple was about 17x. This week, it was hovering around 11x. Although the stock has room for growth, we do not believe that it will achieve the same multiple of October.

The company will slow growth due to weaker financial markets. Their AFFO per share growth for 2016 is expected to be around 10%, as opposed to last year’s 28%. Moreover, they just approved share repurchase plans.

In terms of dividend yield, the dividend increase puts the company above the average among equity REITs.

In short, if you were looking for an undervalued, well-managed, high yield stock, Pebblebrook could be it.

Disclaimer: This is not a recommendation to buy or sell stocks. The highest-yield stocks are not necessarily the best portfolio investment choice. The purpose of this report — which is essentially a snapshot of information available on March 18, 2016 — is to reduce your stock analysis by enabling you to compare stock and sector performance. Please do your own due diligence before making any investment decision.

As of February 29, 2016, the equity REITs are constituent companies of the FTSE NAREIT All REITs Index. Companies whose equity market capitalization is lower than $100 million have been disregarded.

This report is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.